UK economy

Britain's economy will shrug off a difficult start to the year and roar back into life over the next six months, potentially forcing the Bank of England to hike interest rates a year earlier than expected, a new forecast has revealed.

According to the National Institute of Economic and Social Research (NIESR), the ongoing decline in the pound will trigger a boom in exports which, coupled with a sharp increase in wages, could see Britain's economy expand by almost 2%.

That, in turn, would be enough to convince the BoE to raise interest rates as early as next spring, some 12 months ahead of its previous projection. Additionally, should the bank hike the cost of borrowing earlier than expected, it would help high street banks in their efforts to boost their profits and cash reserves needed to sustain the impact of a potential financial crash.

"We are not talking about a rapid return to higher interest rates, but signalling that process – even if it takes five to seven years – will help banks rebuild their balance sheets and create a healthier financial system," said NIESR's director Jagjit Chadh.

Such an optimistic forecast, however, is in stark contrast with a number of economic reports which expect Britain's GDP growth to remain subdued as the country feels the full force of Brexit.

Data released last week by the office for National Statistics (ONS) showed Britain's economy grew 0.3% on a quarterly basis in the three months to the end of June, in line with forecast and higher than the 0.2% gain recorded in the first quarter.

However, the rate of expansion was half of that recorded by the Eurozone as a whole.

On a year-on-year basis, meanwhile, the UK's GDP grew 1.7% in the second quarter, down from the 2% reading recorded in the previous three months, but matching analysts' expectations. That came only days after the International Monetary Fund said it expects the UK economy to grow by 1.7% this year, compared with the 2% it forecast in April, while growth forecast for 2018 remained unchanged at 1.5%.

NIESR, however, reiterated its forecast of growth to stand at 1.7% and 1.9% in 2017 and 2018 respectively.

On Thursday (3 August), the BoE's rate setting committee, which is widely expected to keep the cost of borrowing unchanged, will release its latest inflation report. The forecast is likely to be much gloomier than that delivered by NIESR, with the bank's governor, Mark Carney, expected to highlight that wages have struggled to keep pace with rising inflation.

Britain's wage growth has remained persistently stuck around the 2% mark, falling beyond the curve of inflation in real terms, as the latter stood at 2.7% last month after hitting a four-year high of 2.9% in May.

The think-tank, which had originally predicted inflation would peak at 3.4% by the end of 2017, has since revised its forecast down to 3%, adding it expects inflation to be back within the BoE's 2% target by the last three months of 2019.

NIESR had previously forecast the BoE would wait until Britain leaves the European Union in 2019 before rising interest rates, which have been a historic low since August last year. However, the economic growth could allow Threadneedle Street officials to reverse the drastic cut implemented in the wake of the Brexit vote.

"This rate increase should not be seen as a tightening in policy, but instead as a modest withdrawal of some of the additional stimulus that was injected into the economy after the 2016 EU referendum," the report said.